Investors are boosting their investment in real assets as they search for yield and stable returns in a low-interest-rate environment.
Money managers are nurturing this trend into a major movement of assets by releasing research demonstrating to investors how real assets can be added to both defined benefit and defined contribution plans.
There is no mistaking that more investors are turning to real assets as an alternative to stocks and bonds. A number of pension funds have increased their real asset allocations or hired new real asset managers within the past 12 months. For example:
nThe $13.4 billion Public Employees Retirement Association of New Mexico, Santa Fe, increased its real asset allocation by two percentage points to 5%. It plans to commit $200 million to real asset funds this year.
nThe $17.2 billion City & County of San Francisco Employees' Retirement System launched a search in May for a real assets consultant. The pension fund has had a 12% target allocation to real assets since 2011, but is invested only in real estate.
nEnvironment Agency Pension Fund, Bristol, England, appointed The Townsend Group to run a global portfolio of real assets estimated to total about £240 million ($369 million) over the next two years. Within the £2.1 billion pension fund's global real assets portfolio, 5% is allocated to real estate, 3.5% to infrastructure and another 3.5% to forestry and farmland.
nThe $1.8 billion Austin (Texas) City Employees' Retirement System added a 5% allocation to real assets.
In a recently released paper, J.P. Morgan Asset Management predicts institutional investors will bump up their allocations to real assets to about 25% as they search for income and inflation protection. Real assets have been defined to include real estate, infrastructure, timberland, farmland and commodities. J.P. Morgan also includes long-life tangible assets such as ships and aircraft.
“I wouldn't recommend a 25% allocation to real estate alone,” Joseph Azelby, managing director and head of global real assets at J.P. Morgan Asset Management, said in an interview, adding he would recommend a 25% allocation to a diversified basket that has a real estate anchor, infrastructure as the second-highest suballocation and others to farmland, timber and long-life tangible assets.